Here’s why one fund manager is steering clear of Afterpay (ASX:APT) shares

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Until recently, Afterpay (ASX:APT) shares were just about the hottest stock going on the Australian share market.

The APT share price jumped as high as $23 after the company resumed trading following news it was expanding into the UK by acquiring ClearPay. The acquisition was funded by an institutional capital raise at $17.05 per share.

The gloss has somewhat come off the Afterpay Touch share price since the euphoric days of $23 per share, with the Afterpay share price now trading back at $16.64, a hefty 28 per cent fall for those poor souls who managed to buy right at the top of the market.

Still, zooming out, and even after the recent haircut for the Afterpay share price, it is still up a whopping 333 per cent in the last 12 months, making it easily the best performing ASX 200 stock in that period.

Source: The Capital Club — click here for the full APT chart

Afterpay shares are popular amongst a number of top performing fund managers, including Alex Waislitz’s Thorney Technologies and Chris Prunty’s QVG Opportunities Fund.

Watching Afterpay shares from the sidelines

But the top performing Lennox Australian Small Companies Fund is happy to watch Afterpay from the sidelines.

Writing in its July update, the fund said its underweight position in Afterpay shares negatively impacted on its performance in the month. Afterpay shares jumped 52 per cent higher in July on the back of upgraded guidance and continued momentum in its US expansion.

The Lennox Australian Small Companies Fund said that with Afterpay shares trading on a FY19 Price-to-Equity (P/E) of 109x (a 600 per cent premium to the market), it views the current APT ASX share price as pricing in 100 per cent success in the US and no risk of increased competition or regulation in Australia or overseas.

This mirrors the view from the Spheria Australian Microcap Fund which said Afterpay has a relatively short trading history and thus investors have little idea of how bad debts will look over a credit cycle and what a stabilised competitive environment looks like.

The 2 biggest threats to the Afterpay share price

Competition and regulation are Afterpay’s two biggest threats.

Countering that, first mover advantage in the payment technology space also counts for a lot, and unlike many ASX listed companies, Afterpay truly has a global opportunity to dominate its modern day lay-by market.

The race is on.

If Afterpay continues to grow as quickly as it has been, particularly in the huge US market, the sky could truly be the limit for APT shares. Just don’t expect the share price to always go up in a straight line.

Click here to get the latest Afterpay share price, chart and news.

Afterpay shares don’t look cheap, but these 3 shares do…

Combining countless hours of research with over 30 years of hands-on stock market investing experience, The Capital Club’s founder Bruce Jackson has just published his definitive list of 3 Cheap and Good ASX Stocks for 2018.

Afterpay was not one of them, but the list does include one tiny gold mining stock, and the company one top fund manager calls the cheapest stock in the ASX 100.

Find out why these 3 Cheap and Good Stocks could be better buys than Afterpay. But you better hurry… these stocks may not stay cheap for long.

See the 3 stocks

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au